COVID-19 and Europe’s New Battle of Ideas

On the surface, European Union member states are arguing about whether the bloc should issue mutualized “coronabonds” to help its hardest-hit countries deal with the COVID-19 pandemic. But the real fight is about the future direction of fiscal policy and even the euro itself.

BERKELEY – Europe can see light at the end of the COVID-19 tunnel as the numbers of daily infections and deaths from the virus fall gradually across the continent. But the economic fallout from the “Great Lockdown” is still to come. The International Monetary Fund is forecasting that the eurozone will experience a drop in real GDP of more than 7% this year and only partly recover in 2021, making this downturn deeper than even the Great Recession of 2008-09.

Europe, or rather the European Union, has been largely missing in action during the continent’s most serious crisis in generations. Member states have not only engaged in an unseemly scramble to secure scarce medical supplies, but have also made little tangible progress regarding the EU’s contribution to the economic and financial costs of the crisis.

True, the European Central Bank has rightly done all it could to calm financial markets. But EU member states remain bogged down on the key question of whether the bloc can and will help fiscally stretched countries.

On the surface, the main dispute concerns whether the EU should issue mutualized “coronabonds” to finance health-care spending and other crisis-related expenditure in the hardest-hit countries. Yet, the real fight is not about “innovative financial instruments,” as eurozone finance ministers diplomatically put it at their most recent meeting, but rather about the future direction of fiscal policy and even the euro itself.

In their insightful book The Euro and the Battle of Ideas, the economists Markus Brunnermeier, Harold James, and Jean-Pierre Landau analyzed the role played by ideas in 2010-14, when the eurozone at times seemed in danger of breaking up. They argued that the management of the euro crisis was dominated by clashes between France and Germany, and that the two countries’ positions were largely determined by the fundamental economic ideas that dominated their domestic debates.

This time, however, the key fault line is clearly between Germany and Italy.

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French President Emmanuel Macron is in a relatively comfortable position, because most French voters do not have a strong opinion on Euro- or coronabonds. By contrast, these instruments are at the center of domestic debate in both Italy and Germany – but are regarded very differently in each country.

In Italy, coronabonds are viewed as the natural expression of European solidarity. The government argues that the COVID-19 crisis could not have been expected; that Italy therefore deserves help from its European partners; and that coronabonds are the only acceptable solution.

Many Germans, on the other hand, regard coronabonds as a mortal danger, because they would open the door to the dreaded Eurobonds – which would mean that German taxpayers become liable for Italian debt.

Reasonable proponents of coronabonds in France, Spain, and Italy do not understand this objection. After all, they argue, they are not asking for a German guarantee of existing Italian debt, only that the additional expenses stemming from this crisis should be financed by a common European instrument. But Dutch and German politicians fear mission creep, with a limited issuance of coronabonds paving the way for large, uncontrolled sums of other instruments.

Nor does it help that many in Italy and elsewhere do indeed dream of coronabonds opening the door for Eurobonds. They have long thought that the eurozone needs common debt instruments to become a “complete” monetary union, and they regard the current crisis as the ideal moment to achieve this goal.

The basic reason for this mutual distrust is the absence of a shared vision regarding long-term underlying fiscal principles. And because people see in crises what they want to see, which, as Harvard’s Dani Rodrik recently emphasized, often is an affirmation of their long-held beliefs, confirmation bias has only hardened the opposing sides’ positions.

Thus, Germans see in the crisis vindication of their prudent approach to fiscal policy, because years of balanced budgets mean that their government can now spend much more on helping German workers and enterprises to overcome the crisis. But long-time critics of “austerity” see in Germany’s large budget deficit confirmation of their own position. After all, nobody can object to big deficits at the moment.

Unfortunately, this dialogue of the deaf distracts from the real issue, namely the direction of fiscal policy once the immediate crisis has been overcome. Should governments try to balance their budgets as quickly as possible and start reducing debt again? Or should they continue to run deficits for as long as interest rates remain low? The eventual outcome of this battle of fiscal ideas will be decisive for the future of the euro.

This is not an issue that will become relevant only in some distant future when the economy has recovered. More immediately, as long as this battle remains unresolved, member states will find it difficult ever to agree on a common European strategy to overcome the current crisis.

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Mr Esper, who are the war criminals that assassinated Suleimani who was on peace mission discussing diplomatic rapproachment that Iraq was brokering between Iran and Saudi Arabia?

Assassinating Suleimani (which is illegal, a war crime) is akin to assassinating US Defense Secretary: Will US leaders accept assassinating US Defense Secretary?

Mr Esper, who are the war criminals overthrowing Iran's democratically elected government in 1953 replacing with a puppet dictator, the Shah?

Mr Esper, who are the war criminals backing Saddam (US's best friend at the time) in a decade-long war that killed a million people?

Mr Esper, who are the war criminals shooting down Iran Airbus Air flight 655 (on a scheduled run to Dubai) by SM-2MR surface-to-air missile fired from USS Vincennes in 1988?

Do Iran's warships/ fighter jets ever cruise/fly near Florida or California or any US coasts?

Now, Who is harassing who? Who is provoking who?

All along, Iran was complying the Iran nuclear deal in good faith.

US is the guilty party that unilaterally breaking/withdrawing from the Iran nuclear deal, imposing illegal sanctions to cripple Iran (and crippling Iran's healthcare) which US must be held accountable and US must be condemned.

Is this rule of law?

US must return and must comply with the Iran nuclear deal in good faith, stop all illegal sanctions, stop all illegal attacks.

Iranians will do their best to protect/keep their country safe from invaders like US, a very aggressive, very powerful, and very perfidious power that has Iran surrounded on all sides.

Mr Esper, who are the war criminals attacking/invading illegally (Iraq, Libya, etc) which were (and are) antagonizing/ radicalizing more people so creating more jihadists/ terrorists even in far-flung places (like Indonesia, etc.), destabilizing the whole region, creating killing fields with millions being killed/raped/injured/traumatized and/or displaced?

These illegal attacks/invasions are war crimes (some of the worst in modern history) with these countries wretched and lied in ruins costing estimates of 461,000 to 655,000 deaths (Iraq alone), about 500,000 deaths (Syria alone), estimates of 2,500 to 25,000 deaths (Libya alone)...and millions more of innocents (children, women, etc.) being injured/traumatized and/or displaced (12 million displaced for Syria alone)..this is the very heavy price the ordinary people are paying for the US/UK/France illegal attacks/invasions and these war criminals (Bush, Cheney, etc) must be held accountable.

US armed forces are the biggest terrorist organization in the world.US is the biggest threat to global security and world peace.

Mr Esper, how atrocious can US war criminals leaders be?

Is this your idea of rule of law?

Are these humanitarian values you hold dear?

Justice delayed is justice denied.Bush/Cheney/Blair/Sarkozy/Cameron/Obama/Trump, etc and their senior officers/advisors/generals) are the war criminals with a lot blood on their hands and the UN must take actions to charge/jail these war criminals for life.

US leaders are serial liars and serial cheats.When you're dealing with US leaders, always remember they'll lie, they'll cheat, they'll break laws, they'll attack/invade illegally and committing war crimes (like in Iraq, etc.), they'll use you as useful idiots well then throw you to the wolves... this is how US leaders operate.

US simply is not "agreement-capable" and perniciously destructive, therefore needs to be kicked out.

The region’s governments – Syria, Saudi, Turkey, Iran, Iraq, Egypt, and elsewhere – have both the incentive and the means to reach mutual accommodations. What is stopping them is the belief that the US or some other outside power will deliver a decisive victory on their behalf - if you like Uncle Sam is the puppet attached to the strings manipulated by Middle-East puppeteers to do the dirty work and this is another root cause which worsens/provokes more violence/bloodshed.

Iran's door is always open, ready to work with Saudi to resolve differences and bring stability and prosperity to the whole region.

The world is watching closely as US leaders (and their senior officers/advisors/generals) are pondering/preparing more illegal attacks/invasions (Iran, etc.) and committing more war crimes to do sinister regime changes.

The key issue the author discusses is the difference in culture between France/Italy and Germany/the Netherlands. That is not just folklore but it very concrete.

It was agreed in the Eurozone that its members would limit Goverment expenses to 60 % of GDP.Over the past 10 years Italy has it increased from 116 to 136 %.In the Netherlands it went down from 57 to 49 %.The interest rate on the Euro is kept exceptionally low or else Italy cannot finance its debt.Italy is now asking for solidarity, which it has not displayed to the other EU members over the past decade.Now they also use the corronavirus to solve their Government debt.The North is willing to help with the Corrona trouble, but not with Italian Government troubles.Now it is Italy, but two years ago it was Macron who tried to dump his Government debt on the North, because he had some trouble with pensions in France. Who is next ?

It becomes ever mor evident that the moment is here for Italy to begin printing Lira's.They are welcome to stay in the EU. But when they leave the Eurozone and Euro they will increase their competitiveness.

"Should governments try to balance their budgets as quickly as possible and start reducing debt again? Or should they continue to run deficits for as long as interest rates remain low?"The problem is not to balance their budgets, which is unacceptable for Keynesians. Countries can only run deficits nowadays.

It seems the problem is that a monetary union, which has no common budget, must have similar debt ratios to be sustainable. This is not the case today, this is why the ECB is obliged to make targeted QE (this will be OMT) to close the gap between interest rates of EZ member countries. Therefore if the monetary union wants to be sustainable, there is no other solution to make debt to converge in the future. Needless to say, that it will not be done, all conditionalities have been withdrawn from the ESM.

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